Our shareholder proposals | Improve Tosho’s shareholders’ value Strategic Capital, Inc.
What we hope Tosho to improve the shareholders’ value as a shareholder are 1) improvement of its extremely low operating profit margin through reconsidering mid-term management plan and investment plan and 2) Special dividend funded by disposal of RECRUIT shares to optimize excess net assets.

Our shareholder proposals
(this content shows already withdrawn proposals)

Please find followings. The details are in the link below.

No.1 Disclosure of WACC and its basis of calculation for more effective dialogues.
No.2 Increase in independent outside directors in the board to protect the interests of minority shareholders
No.3 Reconsideration of the mid-term management plan and
implementation of special dividend to optimize excess net assets
No.4 Increase the shareholders’ value through further disposal of RECRUIT shares and improvement of its extremely low operating profit margin.


Tosho’s cost of capital and the profitability of existing business and currently acquired case

At the 2017 AGM, Mr. Yano, the managing director, answered that Tosho recognised its cost of equity as 7% (Link). As Tosho bears almost no debt and its cost of capital nearly equals to the weighted average cost of capital, it is presumed that Tosho assesses its investment criteria as 7%.
Tosho declares the business expansion in new business area in its mid-term management plan. However, Tosho’s main business is printing and the profitability of printing business is extremely low. Mainly due to this, the adjusted ROE(*) in recent years has been lower than 1%. As shown in the long-term comparison of Tosho’s adjusted ROE and its cost of capital Tosho recognises (7%) below, ROE has been lower than 7% since 1990s.

*in case extraordinary profit gained by sales of investment securities is reported, we calculated the adjusted ROE based on net profit after tax calculated by estimated effective tax rate, that is, “Recurring pre-tax profit times (1-tax rate 30%)”. In other cases, we use ROE Tosh announced.

In addition, the profitability of its investment in its new business area seems to be extremely low. In our dialogues, Tosho explained that payback period for the recent investment will be 7 or 8 years.
However, based on our calculation below, the investment return for recent acquisition of CTS in 8 years is estimated at -1,094 mil even excluding amortization of goodwill. Please note that the net asset of CTS was only 308 mil in its full year results just before the acquisition.

Simulation on investment return from CTS in 8 years

※Net profit 32.2 mil in FY2018 is calculated as average of CTS’s operating profits in 3 years before the acquisition after tax calculated by estimated effective tax rate (30%). Please note that amortization of goodwill accrued by this acquisition is not taken account in this calculation. In terms of growth rate of profit, 3% is applied.

If Tosho recognises its required rate of return as 7%, the investment return should exceed 7% otherwise such investments will decrease its shareholders’ value. If Tosho justify its investment of CTS because of synergy effect, etc, Tosho should demonstrate it to shareholders with specific examples. Through increase of transparency of Tosho’s cost of equity, we would like Tosho to reconsider and stop such investments which decrease shareholder’s value.

The problems of Tosho’s board

As stated in “Negative effect due to parent-subsidiary listings”, it is important to protect the interests of minority shareholders and “truly” independent outside directors have a major role in it. Therefore, we proposed Tosho to organize the board of directors of which the majority should be “truly” independent outside directors.
The current 13 members in Tosho’s board are as followings: –
– 6 directors are from Toppan printing
– 5 directors are from Tosho
– 2 outside directors not from Toppan printing but without true independency (**)
The board leaves the investment plan which may decrease the shareholders’ value.
It is hard to say that the board tries to increase the shareholders’ value and the parent company, Toppan printing, abandoned its responsibilities to supervise Tosho (Link).

The structure of the Tosho’s Board

**there is no truly independent outside director in the board. The directors from Toppan is definitely not independent. Also, reminding 2 outside directors are not truly independent neither as followings: –
– An outside director who is an accountant, has been 15 years in office. He was outside director from June 2004 to June 2015 and has been an outside director since June 2015. The period in total is 15 years.
– An outside director who is a lawyer has concluded a consulting agreement with Tosho.

Calculation of proceeds gained by sale of RECRUIT shares in 2016 and the basis of JPY 280 special dividend at the AGMs in 2018 and 2019

We have proposed JPY 280 special dividend per share (hereinafter referred to as “DPS”) for these two years. We calculated the proceeds gained by sale of some of RECRUIT shares as followings and decided to propose a JPY280 special dividend:-

① Calculation of proceeds gained by sale of RECRUIT shares
Sale of the first time Total amount of sales(1,139mil)-estimated tax (1,098mil×effective tax rate of 29.97%)
Sale of the second time Total amount of sales(15,870mil)-estimated tax(15,242mil×effective tax rate of 29.97%)
⇒Sum of above:12,112mil

②Total amount of dividends in case DPS is JPY280
DPS JPY280×(total number of issued shares 43,133,904- treasury shares 352,181)

Tosho increased 10,000 mil general reserve by the resolution at AGM in 2017. As following, Tosho has segregated almost all of the proceeds above as general reserve of retained earnings. Tosho only explains the purpose of the reserve is preparation for future investments. We argue that such reserve should be reduced which Tosho cannot explain when and how it is used.

According to Tosho’s notice of the AGM in June 2018, Tosho states that Tosho have increased general reserve to prepare for future investment but there is no specific information.

The ratio of votes in favour of previous our shareholder proposals

We have executed our shareholders’ right to propose at the AGM 3 times since June 2016. Ratio of favour votes to our proposals are followings.

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